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Hedge Funds Unsure Where Oil Prices Are Going

Following an optimistic start to the year and the best January ever for oil prices, hedge funds and other money managers began the month of February more cautiously as fears about global economic growth outweighed (again) OPEC’s cuts and U.S. sanctions on Venezuela and Iran.

In the latest reporting week to February 5, portfolio managers added more long positions on Brent Crude, but short positions—bets that prices will fall—also rose for the first time this year.

Although the speculative positioning in the week resulted in a slight rise in the combined net long position—the difference between bullish and bearish bets—the increase in short positions suggests that hedge funds are now much more undecided where oil prices will be heading next.

According to data from ICE Futures Europe compiled by Reuters market analyst John Kemp, money managers boosted their net long position in Brent Crude in the week to February 5 by just 1 million barrels. Long positions—bets that prices would rise—increased by 15 million barrels. However, short positions rose nearly as much as longs, with 13 million barrels in shorts added last week.

The rise of the shorts, for the first time this year, could suggest that hedge funds have diverging views about where Brent prices are going next and that bearish concerns such as economic slowdown or no-deal U.S.-China trade talks have prevailed over bullish cues such as OPEC’s cuts, sanctions on Venezuela, and slowing growth in U.S. crude oil production.

Due to the U.S. government shutdown, the Commodity Futures Trading Commission (CFTC) won’t have caught up with up-to-date WTI Crude positioning data until next month.

Judging from the commitments of traders in Brent in the week to February 5, hedge funds were almost equally divided between adding longs and shorts, with longs leading slightly. This compares with a massive retreat in shorts seen in January.

At the end of January, hedge funds and other money managers started to shake off the gloomy expectations of a global recession and waning oil demand growth that had seized market participants for most of the fourth quarter last year.

Yet, the primary driver for the increase in the net long position was the closing of the many shorts from late 2018, rather than a renewed bullishness that oil prices will be rallying.

Between early December and late January, hedge funds raised their net long position by a total of 96 million barrels and increased the net long in seven out of eight weeks. However, the rise in the net long position since early December was primarily the result of closing the shorts, rather than a clear sign that bulls are back.

Between December 11 and January 29, short positions declined by more than 60 percent from 122 million barrels to 48 million barrels, but longs increased by only 27 million barrels, as fund managers were less bearish but surely not enthusiastically bullish on the price of oil.

In the week January 29 to February 5, however, shorts increased by 28 percent—the most since late October and the first rise after four weeks of bears retreating—while the number of long positions rose by 5.2 percent.

While money managers as a whole were undecided where Brent Crude was heading, they boosted bullish bets on gasoil and diesel futures during the latest reporting week, after the U.S. sanctions on Venezuela started to limit the supply of medium and heavy crudes such as Venezuela’s, which are well suited for processing into gasoil, Reuters’ Kemp says.

Going forward, hedge funds will be looking for direction from a range of bullish and bearish factors. No-deal U.S.-China trade talks and economic growth concerns would be attracting the bears, while OPEC’s cuts, U.S. sanctions on Venezuela and Iran, and possible slowdown in U.S. crude production would make more room for the bulls to run.

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